The numbers — Oct mining production
Actual: -7.7% y/y; -7.9% m/m s.a. (October)
Consensus: -2.9% y/y; n/a (October)
Previous: -7.2% y/y; -7.0% m/m s.a. (September)
In October, mining output growth remained in negative territory, at -7.7% y/y, after having contracted by 7.2% y/y (revised from -8.3% y/y) in September. The decline in October is mainly due to base effects: mining had declined by 12.8% y/y in October 2011. Eight of the 12 mining categories posted negative y/y growth rates (refer to Figure 2 overleaf), with the main contributors to the decline emanating from lower production of the following:
Gold (accounting for 17.7% of mining production) delved deeper into negative territory in October, with production falling by a massive 45.7% y/y from a decline of 11.1% y/y in September. Gold mines were expected to be shielded from strike action because their wages are agreed on through a collective bargaining process. However, what started out as an isolated Lonmin Marikana unrest, spread across to gold, iron ore and chrome mines. In October, tension in gold mining resulted in the shutting down of roughly 39% of SA’s gold production. In its Q3:12 FY2012 release, the World Gold Council (WGC) revealed that the supply of gold from mines had declined by 1% y/y. The WGC expects mine supply during Q4:12 to be lower than expected due to strike action in South Africa. Copper (accounting for 1.4% of mining production) declined by a further 56.4% y/y in October and follows a significant 60.2% y/y decline in September. Iron ore (accounting for 14.4% of mining production) fell by 22.8% y/y in October after having increased by 21.0% y/y in September. Other non-metallic minerals, diamonds and building materials (together accounting 7.9% of mining production) declined on a y/y basis.
PGM (accounting for 24.6% of total mining production) increased by 17.6% y/y in October, after having declined by 17.9% y/y in September. Despite the increase, we believe that the mining disruptions in the platinum belt and the subsequent wage increases negotiated by some mining firms will put further pressure on production in the months ahead. We do not foresee any sustained or significant improvement in PGM production, and believe that the synchronised industrial action in the mining sector will be a drag on Q4:12.
The mining sector will continue to face cyclical and structural difficulties, and we are bound to see volatility in y/y numbers in the coming months owing to base effects. This will have adverse consequences for the economy. Whilst mining directly accounts for only 5% of GDP, its indirect impact on employment and export earnings is crucial. Platinum and gold account for 50% of mining exports; therefore, a drop in production will limit exports—potentially pushing the current account further into the red, and limiting growth. The outlook for the sector into Q4:12 remains bleak. Not only are layoffs likely to persist and drag down overall production, but commodity prices will continue to strain the sector.
Following a steep increase in Q2:12, mining production saw growth falter in Q3:12 by 12.7% q/q from 30.9% q/q in Q2:12. The reversal in growth comes on the back of industrial action in the industry which commenced on 10 August. Our view on the mining sector is largely negative. SA mines are faced with weak commodity prices and slowing global demand. Mining inflation remains high, and increases in prices of electricity and electrical components will add to the burden.